Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/228984
Authors: 
Adam, Klaus
Weber, Henning
Year of Publication: 
2020
Series/Report no.: 
ECB Working Paper No. 2370
Abstract: 
Using the official micro price data underlying the U.K. consumer price index, we document a new stylized fact for the life-cycle behavior of consumer prices: relative to a narrowly defined set of competing products, the price of individual products tends to fall over the product lifetime. We show that this data feature has important implications for the optimal in ation target. Constructing a sticky-price model featuring a product life cycle and heterogeneous relative-price trends, we derive closed-form expressions for the optimal in ation target under Calvo and menu-cost frictions. We show how the optimal target can be estimated from the observed trends in relative prices. For the U.K. economy, we find the optimal target to be equal to 2.6% in 2016. It has steadily increased over the period 1996 to 2016 due to changes in relative price trends over this period.
Subjects: 
optimal ination
micro price data
U.K
ination target
JEL: 
E31
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4013-9
Document Type: 
Working Paper

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